High-Tech Rebound
Many had written off Taiwan's Acer Inc. But company Chairman Stan Shih's
willingness to gamble and innovate has paid off

In mid-1992, all Acer Group Chairman Stan Shih could see was red ink: The
Taiwanese company had for two years shoveled hundreds of millions into a
risky joint venture, producing advanced memory computer chips, that had only
recently begun to fill orders. Acer was pouring millions more into its money-losing
U.S. operations, hemorrhaging partially because of a disastrous acquisition
of microcomputer maker Altos Computer Systems. And it was trying to survive
murderous price-slashing in the highly competitive personal-computer market.
All these factors combined to give Acer in 1992 its third annual loss in
three years. It posted a $ 2.8 million loss after taxes on 1992 sales of
$ 1.26 billion. The following year, the Taipei Stock Exchange downgraded
Acer's stock because the company's earnings-to-revenue ratio was not sufficient
to keep its standing on the blue-chip board.

But all that seems like a temporary glitch now. TI-Acer Inc., the joint venture
formed with U.S.-based electronics maker Texas Instruments Inc. (TI) to produce
dynamic random access memory (DRAM) chips, has turned out to be the company's
salvation: TI-Acer generated 80 percent of Acer's $ 85.6 million profit in
1993 and an estimated one-third of the profit last year. Across the ocean,
Acer America Corp. is beginning to generate a healthy return. And Acer has
emerged from the PC price war with record-breaking performances in each quarter
for the past year. Company sales overall were forecast to reach $ 3 billion
in 1994 -- up 59 percent from the previous year. Its consolidated net profit
was expected to hit $ 180 million for the year.

Shih's willingness to take risks, such as investing in the DRAM market, and
to try innovative management strategies has helped turn Acer around and propel
it into the top ranks of the global computer industry. The company that seemed
stuck with the image of the quintessential clone-maker looks likely to become
the 10th- largest PC manufacturer in the world.

"Stan is one of the few leaders in the industry with a vision," says Ronald
Chwang, president of Acer America. "He believes in the role he wants Acer
to play. He sees opportunities and trends ahead of others."

That has been the case since Shih earned a master's degree in 1971 from Taiwan's
prestigious National Chiao Tung University. At his first job, with Unitron
Industrial Corp., Shih helped design and develop the first desktop calculator
produced in Taiwan. He then helped set up another local company, Qualitron
Industrial Corp., where he led the team that designed the world's first pen
watch.

Shih began to realize that the microprocessor and microcomputer industries
had immense money-making potential -- something that banks hadn't grasped
yet. So he teamed up with other techno-freaks, scraped together $ 25,000
and in June 1976 formed Multitech International Corp. primarily to do consulting
on high-tech issues. Eleven years later the company, renamed Acer, produced
its first personal computer. The Acer Group now has 8,200 employees working
in more than 70 subsidiaries in 27 countries. It has expanded to produce
a range of high-tech products, including fax machines and printers.

But some of Acer's expansion efforts brought hard times for the company.
It decided to collaborate with TI in 1989 following an industry-wide DRAM
shortage. TI agreed to provide the technology to manufacture DRAM chips,
and Acer paid for the plant. It was a risky decision. The market for DRAM
chips traditionally suffers huge swings of oversupply and undersupply, and
some manufacturers have lost fortunes. Acer owns 58 percent of the joint
venture, TI owns 26 percent and China Development Corp., a Taiwanese development
bank, owns 16 percent.

Though the investment helped to nearly kill Acer, it has proven to be a wise
one. Not only is the venture profitable, notes Jim Handy, a semiconductor-industry
analyst, it guarantees Acer a steady supply of competitively priced DRAMs
for its PC-manufacturing operations. With TI's chip-making expertise and
Acer's access to Taiwanese capital and labor, says Handy, who works for Dataquest
Inc., a San Jose, California-based research firm, "what you have, in effect,
is a very good tool in the hands of a highly skilled worker -- a combination
that can't lose."

Meanwhile, Shih needed to stem Acer's losses in the U.S., the most demanding
PC market in the world. He initially depended on exceptional outsiders to
run the U.S. division, hiring as president Leonard Liu, a Chinese-American
who was formerly general manager of IBM's software development laboratories
in California's Silicon Valley. It was Liu who arranged the 1990 acquisition
of Altos, hoping that its marketing and other resources would give Acer a
firm foundation in the U.S. Instead the acquisition drained more than $ 100
million from Acer.

Liu resigned in April 1992, and Shih replaced him with Chwang, who had moved
to Acer in 1986 after working for U.S. computer-chip maker Intel Corp. At
the same time, Shih developed a new management strategy. He adapted McDonald's
Corp.'s philosophy of providing goods that are fresh, cheap and quick and
giving buyers exactly what they order. Says Shih: "I asked myself, 'If you
could standardize food, why not computers?' "

This meant Acer had to stop shipping certain components, such as motherboards
, by sea from Taipei because they took months to reach the U.S. market. Given
the continuous technological developments in the PC industry, the time lag
hurt the company's competitiveness. Instead, Acer decided to ship time-sensitive
components to the U.S. by air and assemble the final product there. It has
an assembly plant in Silicon Valley and another in Mexico City, where it
capitalizes on the cheap labor. All that helped make Acer profitable in the
key North American market, which accounts for some 30 percent of the company's
sales.

In line with the fast-food giant's approach, Shih is decentralizing -- or
as he calls it, "disintegrating" Acer's operations and "franchising" its
subsidiaries. The company now follows the "client-server" model of computing,
in which a powerful central computer links and supports a host of independent
smaller computers and peripheral devices. At the same time, each independent
business within Acer, such as Acer Computer International in Singapore, continues
to serve the rest of the group. The company's Taipei and Penang factories
make high-value-added components, such as motherboards, and other key parts.
For markets outside Taiwan, overseas operations assemble the final product,
using some locally produced parts.

By giving affiliated companies greater independence, Acer is able to respond
more quickly to changes in individual markets and to competitors' innovations.
If Shih hadn't decentralized Acer's operations, says one analyst, the company
couldn't have met the price-cutting challenge of industry leaders like Compaq
Computer Corp. and IBM Corp.

As a result of Acer's reorganization and its marketing and research and development
(R&D) programs, says Eric Woo, a Dataquest analyst in Taipei, "Acer will
continue to capture market share from less competitive industry vendors."

The company's R&D work has drawn praise from several quarters. Acer's
engineering, design and R&D abilities "move it in the front of the industry
today," says Ted Hannum, a sales manager with Microsoft Corp., which chose
Acer as one of its many partners to develop computers that would use the
company's Windows NT (New Technology) software.

Even though the Acer Personal Activity Center (AcerPAC), a PC with multimedia
capabilities, sold poorly after its launch in 1992, it nonetheless won the
"Innovation of the Year" award at CeBIT, a leading European computer fair.
Woo notes that setbacks like AcerPAC and the 64-bit RISC PC, whose acceptance
was hurt by the lack of appropriate software, have not daunted Acer's engineers.
"They are willing to challenge any new technology that may lead the company
to the front," Woo says.

Shih can take a lot of credit for that attitude. In fact, he'd rather spend
time with engineers in mismatched socks tinkering with chips and circuits
than hobnob with Taipei taipans. His serious manner, thick glasses and dark
suits make him look as indistinguishable from other engineers as one PC clone
from another. But his ability to navigate a growing high-tech company through
the roller-coaster PC market has made him a standout.

"Technically he is very much in touch with the industry, even though he delegates
a lot," says Acer America's Chwang. "By nature he does not go into details;
he does not micro-manage the company. But he is capable of understanding
the details."

Says Shih: "We don't believe in control in the normal sense. We feel there
is another way to succeed. We rely on people and build our business around
them." He says he has decided to listen more carefully to others' opinions,
even if he is convinced they are wrong. "I consider each view (before making
a decision) because most of the time I'm not the one who has to implement
it," he says.

Shih's management style differs from that of most Chinese chief executives
in other ways. He doesn't mind if his top executives have a high public profile.
Chwang, who engineered Acer America's turnaround, often appears on TV technology
programs in the U.S. and is regularly quoted in the media. William Lu, who
runs Singapore-based Acer Computer International, has been profiled in the
local press.

But Shih also is deeply rooted in tradition. He derives inspiration from
the ancient Chinese board game of Go, or Wei Chi. To win at Go, a player
has to consider the long-term effects of every move and follow certain strategies,
such as huo yen (establishing self-sustaining strongholds, which Shih hopes
to accomplish through decentralization) and wei kong (encircling open territory).

And in many respects, Acer is a typical Taiwanese high-tech company. It has
benefited from Taiwan's aggressive technology-development programs, such
as cheap government loans. And Acer has a factory in Hsinchu Science-based
Industrial Park, a mini-Silicon Valley created by the government in the early
1980s. Companies there enjoy certain tax advantages and government funding
for innovative R&D programs.

Yet Shih tries to disassociate Acer from its home base in the public's mind.
"Taiwan's reputation is for low-end products," he says, explaining why he
didn't want Acer's computer notebook to be used as part of a Taiwan public-relations
campaign in the U.S. "Even bankrupt companies in Silicon Valley have a better
image than companies from Taiwan."

Eckhard Pfeiffer, chief executive officer of U.S.-based Compaq, the No. 1
PC company, alluded to this when he questioned the emerging Asian challenge
recently at a news conference in Singapore: "It will take some time before
doubts about the quality of some Asian products are fully removed," Pfeiffer
said. The normally polite Shih momentarily lost his cool when a journalist
raised this point afterward. "Many American companies pay a low price for
our quality, our labor and our talent," he said, fuming. "They take advantage
of us and that's not fair. Why should we charge low prices and take so much
shit?"

Some Asian products do have problems, Shih admits. "Our (Asia's) quality
is not consistent," he says. "And we have not known how to communicate our
brand names effectively to the market. At Acer,we are aggressive in trying
to change this image."

Taiwan suffers from a poor reputation even within Asia. In 1989, when Acer
teamed up with PT Metrodata Sistika in Indonesia to sell PCs, sales were
sluggish because consumers there didn't believe that a Taiwanese company
could provide sophisticated technology. But today, says Bobby Arifin, Metrodata's
general manager, "the name that carried a question mark is now parked on
most professional desks." Acer, according to the company, leads the market
there with a 16 percent share.

Shih contends that the best Asian competitors have lower cost structures
and are better prepared than big U.S. players to deal with rapid change.
"Our chance is now," he says. "We must create and innovate quality, promote
brand names aggressively and communicate our story."

That won't be easy, though. Shih concedes that Acer's own top managers remain
too technically oriented and need to learn more about the market. "This is
the weak point of Taiwanese companies," he says. "They are not able to exploit
their technical capability to the level where it reaches their market potential."

Acer hopes that won't be the case as it pushes sales in developing countries
around the world. The fastest-growing computer markets in the next two years,
according to U.S.-based market researchers International Data Corp. (IDC),
will be in developing countries like India (30 percent annual growth), Thailand
(28 percent), Mexico (24 percent), China (20 percent) and Malaysia (17 percent),
followed by Chile, Argentina, Venezuela, Brazil and Taiwan.

Acer spun off in 1993 its most profitable division, Singapore-based Acer
Computer International, to oversee Asia, Latin America, Africa and the Pacific
Islands, a massive territory it refers to by the acronym ALAP. Not surprisingly,
the ALAP region is Acer's fastest-growing source of revenue. Acer claims
to lead the market in much of Southeast Asia -- the Philippines, Thailand,
Malaysia and Indonesia -- and parts of Latin America, including Panama, Uruguay
and Mexico. "Careful planning as well as the low importance given by the
U.S. vendors to the Latin American market have contributed to Acer's success,"
says Anurag Agrawal, senior researcher at IDC. "Acer has also been one of
the first entrants in Africa and has now started reaping the benefits."

But developing those high-growth markets won't be easy. Acer is wary about
moving into China, since a rapprochement across the Taiwan Strait must precede
any significant foray. And competition elsewhere is tough. As a result of
the price-cutting wars, Compaq now leads in Singapore and New Zealand and
is close behind Acer in Malaysia and Thailand. Compaq also is set to become
the leading PC company in Hong Kong.

But Acer's position in the region is strong enough for David Hoffman, director
of accounting firm Coopers & Lybrand's Taipei office, to predict: "If
it makes the right moves, Acer could be the dominant brand in the Asia-Pacific/China
market 10 years from now. By that time, this market alone will be sufficient
to support a multibillion-dollar Acer."

Acer continues to expand in other ways. TI-Acer's wafer-fabrication plant,
which now makes 4-megabit DRAMs, soon will be making 16-megabit and eventually
64-megabit chips. The joint venture plans to pump another $ 400 million into
the facility, doubling the initial investment and allowing it to churn out
each month 9,000 200-millimeter wafers, which are then cut into DRAM chips.

In the DRAM market, says Handy, "things are on an unparalleled roll, and
it looks like the business will stay really strong throughout 1995." But
the undersupply of DRAM chips might end next year, he says, "narrowing profits
to the absolute minimum and taxing the forbearance of all DRAM manufacturers,
including the TI-Acer relationship."

Acer also is considering some strategic changes as a result of the recent
PC-price wars, when its consolidated gross profit margin fell from 25 percent
of sales in 1991 to less than 22 percent in 1992. After years of aggressively
promoting its own brand, Shih now concludes that Acer may have overdone that
strategy.

"Nobody is going to pay an extra thousand bucks to see a familiar logo on
his desktop," as Compaq's Pfeiffer puts it. Today's PC buyers know they can
get off-the-shelf products with the processor, memory and software to suit
their needs.

So Acer is pursuing more deals to sell its computers through other makers'
channels. In 1992 some 74 percent of Acer's production was under its own
brand. In 1993 it dropped to 68 percent, "but even that's way too high,"
Shih says. "We'd like the ratio to be even." The company plans to reach that
goal next year.

Acer's biggest advantages lie in the concentration of its suppliers, its
manufacturing infrastructure and its engineering resources. It costs Acer
much less to bring a product extension like a fax machine to market than
it would Compaq or IBM. "Acer's development and manufacturing-cycle times
are among the fastest in the industry," explains Coopers & Lybrand's
Hoffman. This enables the company to squeeze costs, from design and mass
production all the way to delivery to customers.

Acer's plans to "franchise" its subsidiaries are an attempt to further lower
costs, reduce inventory and offer flexible equipment configurations. It intends
to form joint ventures with local investors and take an ownership stake of
19 percent to 40 percent -- small enough not to stretch the parent company's
resources, yet large enough to maintain control. Twenty-one subsidiaries
in various markets are slated to go public by the year 2000. Acer hopes to
list its Computec de Mexico on the Mexican stock market, Acer America Corp.
on the New York Stock Exchange and Acer Computer International on the Singapore
stock market within the next two years.

The franchise effort hit a roadblock last September when the Taiwan Stock
Exchange rejected the listing applications of two subsidiaries. Exchange
officials said Acer Sertek Inc. and Acer Peripherals Inc. didn't have a history
of adequate financial independence from their parent company to qualify for
separate listings.

But such a temporary setback won't upset Shih's plans. Again and again, Acer
has proven its "long-term competitive mentality," says Dataquest's Woo. The
boy who once amazed neighbors and teachers with his mathematical feats when
he was growing up in the fishing village of Lukang is sure to continue to
surprise competitors with his feats as Acer's president.

Looking ahead, Shih says: "To survive in the 1990s a company will need not
just a good product or a brand name, but it will have to be willing to stay,
to be able to change the lines of production quickly." Acer looks ready to
do just that.